World leaders to ease budget-reduction targets to keep economy churning

OTTAWA – Financial leaders from the world’s biggest economies, who wrap up their two-day meeting Monday, are expected to announce they are easing budget-reduction targets to ensure the “pace of fiscal consolidation is appropriate to support growth,” according to a draft G20 communique.

“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets,” the draft says, according to Reuters, quoting a G20 source.

“The United States will carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-term path while avoiding a sharp fiscal contraction in 2013.”

According to Reuters, the draft also says the G20 “will ensure our public finances are on a sustainable path, in line with the medium-term Toronto [G20] commitments in the case of advanced economies. Wewill ensure the pace of fiscal consolidation is appropriate to support growth.”

The communiqué, to be released at the end of the session, is expected to address the slow progress in global financial reforms, known as Basel III.

Eurozone’s debt problems, now nearly three years old, have fueled concerns over another global downturn.

That crisis appears to have entered a more positive phase — though far from resolution — as the European Central Bank works with governments and the International Monetary Fund to pull Greece, most critically, from the edge of collapse and a still-possible exit from the 17-nation currency zone.

The fate of Spain and Italy — facing their own sovereign debt concerns — remains unclear, and still a work in progress.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney are expected to deliver similar messages on the global economy, sovereign debt, austerity measures and the need to stay the course banking reforms — scheduled for initial introduction in 2013.

For the Basel agreement, “Canada is on track,” Mr. Flaherty told Canadian reporters Sunday evening before he and Mr. Carney attended a working dinner of G20 Finance Ministers and central bank governors. “We need to push at that [issue] to see that there is commitment to Basel III” in other countries.

But he added, the U.S. fiscal cliff is the “biggest” risk for Canada and other countries.

“I think the primary issue is to make sure we keep the G20 relevant and we move forward on the framework for strong, sustainable growth, and that countries reaffirm their commitment to keep their commitments,” he said.

“Now, there may have to be some modification with respect to deficit targets. The Toronto [G20 summit target] was to cut the deficits in half by 2013. That may not be compatible for the Americans with their fiscal cliff. . . . So there may have to be more time there.”

It is the progress, or apparent lack of it, on banking reform that is becoming another focal point of the G20 meeting.

Canadian officials maintain the Basel rules — the most stringent of these being a massive jump in bank capitalization over six-year time frame — must go forward in their current form and previously agreed to schedule. But privately, there are concerns that negotiations as stumbling.

The concern is that setting aside so much capital would limit the ability of banks to lend money and, as an outcome, hamper economic growth.

“For the ones that don’t have regulations in place in January, the question will be, what kind of punishment will they face?” Juan Manuel Valle, head of banking supervision at the Mexican Treasury, told Reuters. G20 host Mexico currently holds the presidency of the global body but will pass it on to Russia in 2013.

But it is the U.S. — with its fiscal cliff and Tuesday presidential election — that is grabbing much of the attention in Mexico City, and not only for the obvious reasons.

U.S. Secretary Treasurer Timothy Geithner did not attend, sending Undersecretary for International Affairs Lael Brainard in his place. Mr. Geithner, a powerful voice is G20 affairs and someone who could have provided strong fiscal commentary on the U.S. fiscal crisis, has stated he will step down regardless of who wins — Barack Obama or Mitt Romney.

French Finance Minister François Baroin also stayed away, as is European Central Bank president Mario Draghi — a surprise development given his leadership role during the euro debt crisis.